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The US government could take up to a 40 per cent stake in Citigroup by converting most of its preference shares in the bank.

According to the Wall Street Journal, the government could convert part of the $45 billion (£31 billion pounds) of preferred shares it bought last year in a bid to stabilise the business.

Bank executives hope the stake will be closer to 25 per cent, the Wall Street Journal said.

Currently, the preferred shares amount to a stake of less than eight per cent.

The plan would not require any new taxpayer cash but would dilute existing shares in Citigroup, which owns UK online bank Egg.

The Financial Times said the government's stake would bolster Citi's capital base, but keeping it below 50 per cent would avoid nationalisation.

Citi could also raise capital with a new rights issue, the paper added.

The reports follow a slump in Citigroup's stock price last Friday, when shares dipped under $2, on investor fears US banks could yet be nationalised to avoid collapse.

Neither the US Treasury nor the bank have confirmed the plan yet.